, Student Loan Interest Rates Increase On July 1, The Nzuchi News Forbes

Student Loan Interest Rates Increase On July 1

, Student Loan Interest Rates Increase On July 1, The Nzuchi News Forbes

The interest rates on new federal student loans and Parent PLUS loans will increase by almost a full percentage point on July 1, 2021.

Why are interest rates rising, given that the pandemic is still ongoing?

Federal Student Loan Interest Rates Pegged to Statutory Formula

Interest rates on federal loans are fixed, but each year’s new loans have a new fixed rate.

Interest rates on new federal education loans reset each July 1, based on the high yield of the last 10-year Treasury Note auction in May.

This formula is set by law and is not subject to the discretion of the U.S. Department of Education. The Higher Education Act of 1965 [20 USC 1087e(b)(8)] specifies the interest rates as follows:

  • Federal Direct Stafford Loans (Undergraduate): High Yield + 2.05% with an 8.25% cap
  • Federal Direct Stafford Loans (Graduate): High Yield + 3.6% with a 9.5% cap
  • Federal Direct PLUS Loans (Parent PLUS and Grad PLUS): High Yield + 4.6% with a 10.5% cap

Since the high yield on the May 12, 2021 10-year Treasury Note auction was 1.684%, the new interest rates will be 3.734%, 5.284% and 6.284%, respectively.

Although these interest rates are higher than last year’s record low interest rates, they are still among the lowest interest rates in the history of the federal student loan programs.

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Impact of the Payment Pause and Interest Waiver

The payment pause and interest waiver is set to expire on September 30, 2021. In an interview with the Education Writers Association (EWA) on May 20, 2021, U.S. Secretary of Education Miguel Cardona said that the U.S. Department of Education is looking into a possible further extension.

, Student Loan Interest Rates Increase On July 1, The Nzuchi News Forbes

Until the payment pause and interest waiver expires, the interest rate on all eligible federal loans will continue to be temporarily set at 0%. After the payment pause and interest waiver expires, the interest rates will return to the previously specified applicable rates.

Options after the Payment Pause and Interest Waiver Expires

Borrowers who are still experiencing financial difficulty when the payment pause and interest waiver expires will still have a few options, some of which will waive all or part of the new interest that accrues.

These options include the economic hardship deferment, unemployment deferment, general forbearances and income-driven repayment plans.

During a deferment, the federal government pays the interest on subsidized loans. The interest on unsubsidized loans remains the responsibility of the borrower. If this interest is not paid as it accrues, it will be added to the loan balance at the end of the deferment period.

During a forbearance, the federal government does not pay the interest on any loans, subsidized or unsubsidized.

Borrowers who have no or low income may be able to qualify for the equivalent of a payment pause using an income-driven repayment plan. If your adjusted gross income (AGI) is less than 100% of the poverty line (ICR) or 150% of the poverty line (IBR, PAYE and REPAYE), your monthly payment will be zero. If you are already in an income-driven repayment plan and lost your job or experienced a pay cut, you can ask the loan servicer to recertify your income early. The loan servicer may ask for a copy of the layoff notice or proof of the recent receipt of unemployment benefits.

Some of the income-driven repayment plans may involve a full or partial interest waiver. The federal government will pay the accrued but unpaid interest on subsidized loans during the first three years under the IBR, PAYE and REPAYE repayment plans. In addition, the federal government will pay half of the accrued but unpaid interest on unsubsidized loans during the first three years under the REPAYE repayment plan. After the first three years, the federal government will pay half of the accrued but unpaid interest on both subsidized and unsubsidized loans for the remainder of the repayment term under the REPAYE repayment plan.

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